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Confusing Times  – Simple Measures

The headlines may change, but the theme is the same — too much debt.

Weather it is the never-ending saga of European debt (Greece, Portugal, Spain), or the debt-ceiling gridlock here in the US, policy makers, politicians, economist, investors — everyone is trying to make sense of out the debt.

No one has any answers, just best guesses.  In the midst of all of this confusion, however, fiduciaries still must act prudently.  What’s the best course of action?

First, and foremost, fiduciaries do not need to be economic or investment experts or savants.  They do not need to look into their crystal balls and predict the outcome or even the best course of action.

Instead, they must act prudently.  The following actions will advance their fiduciary obligations:

1.  Review investment policy statements and investment accounts

Simply identify the investment accounts or strategies which might be effected by the debt issues.  One could say that all investment portfolios could be effected.  However, it would not be difficult to prioritize the accounts.  No doubt cash,  money market, stable value, and other fixed income portfolios should be at the top of the list.

2.  Meet with your consultants and advisors

Pick and the phone and request a meeting with your advisors — either in person or via teleconference.  Don’t worry if it isn’t time of a quarterly or half-yearly portfolio review.

3.  Obtain their analysis of the market environment and their recommendations

Remember, while a fiduciary does not have to be an expert on these issues, your investment advisors do.   They are paid to be experts.   Therefore, they should have cogent positions and explanations for the current market environment.

4. Question their assumptions

Don’t blindly accept their responses.  Questions their assumptions.  Explore alternative options in the event that their predictions don’t materialize.

5.  Inquire if they have conducted stress tests on the portfolio

Simulating various market conditions has become a standard tool for monitoring investment portfolios.  Require  your managers to provide you with the results of these various tests.  And, most importantly, determine if you are comfortable with the results.

6.  Get recommendations in writing

Don’t be bashful.  Ask your advisors for their advice in writing.  If they hesitate, explore their motivations.  But, continue to press.

7.  Document, Document, Document

Document your process.   This cannot be stressed enough.  Contemporaneous written records of your process and the results of the process are critical to fiduciary prudence.

The issues are daunting.  The landscape changes daily.  Nobel prizing winning economists line up on every side of the issue.

For fiduciaries, be diligent about your process.  This will ensure that you are acting in the best interests of plan participants.

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